§ I now turn to the issue which must form the core of any Budget speech, the Budget judgment.
§ Britain's performance in the economic field is not a matter for the Chancellor alone, although he is liable to get the blame when things go wrong. Every Department of Government also has its part to play, but in the last resort success or failure will depend on the efforts of every man and woman in the country. It is they who produce the goods, who spend and save the money. The social and, indeed, the human climate is as likely to influence their efforts as anything which is done in the strictly economic field.
§ But the Chancellor of the Exchequer has one critical responsiblility which no one else can share: his Budget must provide the framework for effective action by the nation as a whole. It must try to create that specific balance between revenue and expenditure which is likely to influence the level and pattern of demand in the economy in the way most appropriate to the circumstances foreseen in the year ahead. It is a task of appalling difficulty, as all my predecessors know, depending as it does on assumptions about economic behaviour which may often have no firm scientific basis and on predictions about the future which must be drawn from statistics, often unreliable, about the past.
§ For us in this House, perhaps the best analogy is with the infant art of psephology. We know from recent personal experience how difficult it is to form an accurate picture from the opinion polls of what the British people really think. Still less can we predict, on the basis of even the best information about the past, how the same people will think and vote in 290 three weeks' time. If this were not so, I would not be presenting my Budget this afternoon.
§ Demand management is no more reliable an art. We must approach the Budget judgment with the same caution and the same scepticism about the dependability of some of the evidence available as one approaches the decision to call a General Election. The Budget judgment is very like that decision in another respect as well: it is easier to make at some times than at others.
§ This is one of the more difficult times. In any situation in which such uncertainties abound, perhaps the most important thing is a clear picture of one's objective and of the general principles which must guide one in achieving it.
§ The challenge the nation faces today, though as formidable as any in our peacetime history, is one we can be confident of overcoming if we can now combine in a sustained and united effort. The rewards of success and the penalties of failure are not to be counted in economic terms alone. Unless we can somehow halt the accelerating inflationary trends in our economy, the resulting political and social strains may be too violent for the fabric of our democratic institutions to withstand. Britain is at present moving fast in the wrong direction. Serious dangers lie very close ahead. Somehow we must steer ourselves on to a safer course. Yet to seek to do so too suddenly could produce the very catastrophe we seek to avoid—and perhaps produce it only a year or two before the offshore oil comes to our aid.
§ All recent history teaches us that we must not expect or seek too sudden a reversal of the trend. This year our task is to arrest the momentum which has recently developed in inflation and the balance of payments deficit. If we can achieve this in the next 12 months, we can look forward to a steady improvement in the years which follow. It is in this mood that I approach the central decisions which must determine the shape of the Budget as a whole. I have been guided by four crucially important principles.
§ First, we must make the fullest possible use of the manpower and resources available to us. I totally reject the philosophy that would cure high blood pressure in the economy by bleeding it to death. This principle means more than simply 291 a high level of employment: it means a resolute attack on waste in every area of the economy—and of our society, too. We must not waste manpower or resources by leaving unused what we should use, or by treating scarce and expensive resources as if they were cheap and abundant, or by diverting resources to prestige projects which bring the nation little material benefit. Indeed, an attack on the waste which has come to disfigure so much of modern industrial society must be a central theme in many areas of our national policy for the years ahead.
§ Secondly, we must seek a sustained improvement in our balance of payments for all the reasons I have just given.
§ Thirdly, we must restore the people's confidence in money. The men and women who work to produce our wealth must know that the wage settlements they make will hold their value. Otherwise, inflation will corrupt the whole basis of our society, and because we cannot hope to cure inflation immediately, we must take steps to protect against its consequences those who are least able to defend themselves.
§ Fourthly, as an essential pre-condition of success in achieving our other three objectives, we must re-create that sense of social unity on which Britain has always had to rely at a time of national crisis. This means convincing the whole nation that the burden of our sacrifices and the rewards of our successes are fairly shared.
§ The economic judgment of my Budget is concerned with the first three of these objectives, but the essential fourth objective must shave its character at every point.
§ Let me expand the first two principles, beginning with the full use of our resources. Although I am determined to maintain the momentum now developing in the aftermath of the three-day week, I must ensure that the pressure of demand in the economy does not get out of control, as it did towards the end of last year. The rebound from the depression of early 1972 was allowed to develop so rapidly that from the middle of last year bottle-necks were developing, skilled labour was becoming scarce, and imports were being sucked in. Demand had out- 292 stripped our capacity. We cannot afford to make that mistake again. But, equally, we must avoid producing a depressed economy and low investment. To get this balance right is, as the House knows, the most difficult matter of judgment at any time. It is particularly difficult at this moment when so many uncertainties cloud the future.
§ But to achieve growth through the full use of our resources is not enough. We must shift the pattern of growth in our economy towards exports and import substitution. Our balance of payments deficit must be reduced. The measures of exchange control I have already mentioned will help us here on capital account. Of our current deficit, a good part is due to the higher price of oil, and we accept the view of the OECD and of the IMF that it would be wrong for the industrial oil-importing countries to seek to eliminate that part of their deficits in the near future. But in our case we have a large underlying deficit as well. This part of the deficit must be reduced. We must therefore achieve over time a large switch of resources out of domestic use and back into the balance of payments. To illustrate the size of the task the current account deficit in the fourth quarter of last year was equivalent to 4½ per cent. of gross domestic product, a fraction three times as great as that faced by my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) when he held my responsibilities after the election in 1964.
§ Not all the objectives I have set myself can be realised quickly, still less through the medium of a single Budget. The House will recognise that three weeks is far too short a time to turn into practical legislation some of the ideas which I believe are essential to the achievement of our long-term aims. Moreover in the exceptionally fluid state of the world economy developments in the months ahead could well falsify some of our present expectations and call for adjustments in my strategy. I have, therefore, decided not to introduce all my proposals in one Budget. In this Budget I concentrate on those measures which are essential now. If the House and the country permit I intend to introduce a second Budget later in the year. This will not only enable me to deal with some of the more fundamental changes 293 in the taxation system which I judge to be necessary; it will also give me the occasion and the opportunity to make any further adjustments which are needed to influence demand and keep the level of employment up.
§ At this moment, if I were concerned only with managing the domestic aspects of our economy, I should prefer to risk having a bit too much demand rather than too little. So I might find the argument for some mild reflation a tempting one. I want to see more investment, and businessmen are more likely to invest if they feel certain about continuing growth of demand for their products. But we cannot shut our eyes to external economic problems, as the previous Government discovered to their cost. Taking our total situation into account, I believe that, given our present external problems, a reflationary Budget at this moment would involve us in unacceptable risks. I do not want to re-create the circumstances of last year when valuable opportunities to export were lost because products which could have been sold abroad were pulled into the home market and our imports continued to rise at an alarming rate.
§ I have therefore decided that my Budget must ensure that there is enough room fully to exploit the opportunities for exports which our present competitive position has opened and also for the industrial investment needed for export-oriented growth. My objective is to see that the aggregate demand in the economy, including export and investment, rises at a rate which can be met comfortably by increasing output, and to do so with the minimum of disruption and unemployment. This must be a continuing process to which I shall make a further contribution in my next Budget.
§ Some hon. Members may argue that I should not leave room for the expansion of exports and investment until the demand is clearly there. But there is all the evidence we need that the demand is waiting to be met. Our manufacturers now enjoy a very considerable price advantage over their competitors. Since exporters are free from domestic price control, they can expect greater profits from selling abroad.
§ Of course there are bound to be some frictional costs in adjusting to a new pattern of output and demand, but we 294 must make that adjustment. Designs will have to be changed for export markets and to compete with imports, factories will have to be re-tooled, and so on. My strategy does not ignore these costs, but will keep them to the barest minimum. Not to leave room for the growth of exports and investment would simply make certain that this growth would never take place.
§ Before coming to my Budget judgment, I listened to a good deal of skilled advice from both inside the Treasury and without. I think the right hon. Member for Altrincham and Sale will agree that advice is perhaps the only commodity of which no Chancellor will ever feel a shortage. I only wish that I could believe it all and that it was possible for me to change my views as rapidly and as completely as some of the distinguished writers who offer me advice. Everyone is agreed a least that in the immediate situation there is excess demand. Opinion is less unanimous about the position later in the year, which is hardly surprising. The precise course of world prices and of world trade is uncertain. The effect of three-day working on private investment, including the rebuilding of stocks, is particularly difficult to forecast, So, too, is the likely course of private consumption in the light of the new relationship between wages and prices which threshold payments will create. Weighing up all this, my judgment is that this Budget should be broadly neutral on demand, with the bias, if any, on the side of caution.
§ This does not mean that we can afford a public sector borrowing requirement at anything like the level of last year. The vast deficit of the public sector was then an important factor in the excessive monetary expansion. So I am aiming at a massive reduction in the public sector's borrowing requirement, a reduction of about £1,500 million compared with 1973–74.
§ I have considered carefully whether I should take any special action to promote investment. As a country we have an exceptionally large arsenal of investment incentives, and I do not think that it would be right to make it larger. We must, however, help industry in the development areas, as the House knows. We will therefore at the least 295 maintain the existing arrangements for regional employment premium while con-considering further possibilities for the future. We will continue the existing rates of payment beyond September 1974, which is the date when the present commitment to maintain these rates runs out, and the Finance Bill will provide accordingly.
§ But the best assurance that businessmen can be given as a basis for their investment decisions is that it is the aim of Government policy to maintain output at a high and sustainable level. I hope that this can now be seen to be my aim.
§ But my Budget is also concerned with the deliberate and carefully considered redistribution of fiscal burdens so as to help those less able to bear them and place them on the shoulders of the better off. I believe that this Budget must help restore that sense of national unity which has been so lacking in the past few years. It must be an essential instrument in establishing that social contract on which the solution of all our problems must depend.